One of the bellwether sectors of the economy, and the market, is the auto industry. Numbers and trends surrounding new and used cars, as well as auto parts, provide significant economic data.
New cars are often the first consumer product to suffer, and there is a spike in used cars to replace them. Likewise, as the economy improves, new cars are one of the first things to recover.
As an advertising salesmen once told me, “You can tell the health of the economy based on the number of car commercials you see on TV.”
Credit and the Auto Industry
Now, another element that is mixed into this issue is consumer credit. As the use of credit increases, we also see that money used to buy things like cars — mostly used cars.
The Fed has kept rates low for years, allowing people to use cheap money to buy stuff that they might not normally buy. Many of them continue to flock to houses (uh oh), but many are flocking to both new and used autos, and according to the New York Federal Reserve (page 8), it is occurring across the credit quality spectrum.
It’s a choppy graph, but one that is on an upward trend. So far, so good. That seems to suggest a good economy, albeit one based on cheap credit.
However, on page 13 and 14 of the Fed’s report, we see new delinquencies starting to flatten out after a long period where they were declining, and seriously delinquent auto loan rates are increasing. That tells us that people may be starting to default on their vehicle loans.
Now, there’s some data over at Zerohedge.com that’s worth examining. I regard the website as alarmist to say the least, but that does not mean one should dismiss the content or the data. After all, data is data. The question is what that data means.
ZH shows a decline in the Manheim Used Car Price Index. As the price of used vehicles falls, the trade-in value of those already owned also declines, making them worth less. It thus incentivizes the consumer to walk away from the loan as the asset falls in value and depreciates. That’s what happened with the mortgage crisis, and houses were supposed to be assets that didn’t even depreciate.
These are just some data points, but as they begin to coalesce, it suggests some bad things, and those interested in the auto industry should take note.
Auto Stocks’ Performance
Taking a look at the entire auto industry, the luxury sector has been struggling. BMW (BAMXY) is seeing 13% year-over-year declines in its total sales, and the stock is 30% off its highs. Daimler AG (DDAIY) has the same problem, with Smart USA cars down 18% in sales, and its stock down 30% as well.
Mazda Motor Corp (MZDAY) is not winning over consumers, with a 27% YOY sales decline and 40%-plus stock price decline. Over at Volkswagon AG (ADR) (VLKPY), the stock has been cut in half and its flagship brand is down 10%, while Bentleys are down 52%.
However, even some of the go-to consumer names are struggling. Toyota Motor Corp (ADR) (TM) stock is down 30% on a surprising 4.2% YOY sales decline. Over at General Motors Company (GM), the classic Buick line is down 11.3%, and Cadillac down 5.1%.
Just about every other brand, however, is doing quite well. That sends us a few mixed messages, since the overall new car sales numbers are up 3.1% YOY.
However, the First Trust NASDAQ Global Auto ETF (CARZ), an exchange-traded fund which owns all the auto manufacturers, is down about 20% YOY. That tells me that investors are not buying into any good numbers in the industry. They may have figured out there are problems.
I see all of this as very bad news. Yes, the market may have discounted the bad news, looking out into the future as it does. However, when combined with these rising delinquencies and easy credit, I fear things could still get worse.
And as mentioned, it also says some potentially awful things about the economy.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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